If you want to grow your business but you’re confused about the best way to do this, scenario planning can help you be confident in your decision.
What is Scenario Planning in Finance and why is it Used?
Scenario planning is used in strategic accounting to predict various scenarios. Best case, worst case, and in between to compare the impact on different aspects of the business.
This helps to identify opportunities to grow, build financial resilience, and navigate changes with confidence (instead of throwing spaghetti at the wall and hoping it sticks).
What is the Difference Between Scenario Planning and Financial Forecasting?
Financial forecasting uses historical data to predict future financial performance. But scenario planning explores many possibilities.
Financial forecasting only considers current data. If something unexpected happens, such as problems in the supply chain, it can leave the business unprepared.
Who is Responsible for Scenario Planning?
Senior management usually deals with scenario planning. Although many businesses partner with a strategic accountant to give them peace of mind.
Benefits of Scenario Planning
Scenario planning is time-consuming and can be influenced by biases (if undertaken internally). But there are many benefits to it.
Improve Decisions
By comparing the impact of different scenarios on your business, you can be confident that you have made the best decision.
It can help you get clear on what needs to be done, how to allocate resources, and enable you to explain your decisions to investors without feeling like a rabbit in the headlights.
Increase Agility
When you are prepared for different scenarios, you are in a better position to be flexible and react quickly to changes.
Competitive Advantage
With business scenario planning, you can be one step ahead of competitors. You may find opportunities that can be taken advantage of before your competitors do, such as entering new markets.
Enhance Risk Management
Laying out different possibilities helps to identify vulnerabilities and prepare for these without a last-minute panic. This helps you to navigate uncertainty and reduce the risk of unexpected costs.
Increase Creativity, Learning and Innovation
Using scenario planning can help your business learn and use this to inform the future of the business. It encourages staff to think about ways to creatively solve problems.
Scenario planning has also been shown to provide an opportunity for engagement of staff, who often want to be involved in the larger direction of the company.
Types of Scenarios to Consider When Scenario Planning
There are various external and operational factors to consider when scenario planning.
Economic Scenarios
Changes to the economy will impact business, such as interest rates rising.
Supply Chain Disruptions
There have been various examples of this recently, such as medicine shortages in the UK, in part due to supply chain issues. If there are delays, increases in raw materials, or a wide range of other possibilities to disrupt your supply chain, then this can impact your business.
Market Conditions
If there are changes, such as your demand increases but you weren’t prepared, then you may lose sales.
Changes to Regulations
Changes to trade agreements, new sustainability legislation, or other legal changes can mean you need to change direction.
For example, the new biodiversity law, Biodiversity Net Gain (BNG), requires developers to ensure a 10% increase in biodiversity on development sites. This means possibly added costs which could impact revenue if not prepared for.
Technological Changes
With AI, technological changes have happened at breakneck speed.
Being prepared for changes in tech can help you take advantage of opportunities before competitors invest in them, saving you from the frustration of thinking, ‘I wish we’d done that first. ’
Workforce Issues
There have been staff shortages across a range of industries in the last few years. Increases to minimum wage and National Insurance contributions have seen many businesses struggle.
Scenario Planning Models
There are different types of scenario planning based on your goal and what types of insights you want.
Quantitative Scenario Planning
This is using number-driven scenarios to show the direct financial impact of changes. They often use a best- and worst-case scenario.
Use case: If turnover falls by 10%, how will this impact revenue?
Operational Scenario Planning
The focus of operational scenario planning is to test the operational resilience under different conditions.
Use case: If there is a delay in deliveries, how does this impact revenue?
Normative Scenario Planning
These scenarios are vision-led. They work backwards from a desired state to understand how to achieve their goals.
Use case: If the business wants to achieve Net Zero by 2030, what are the operational and financial implications?
Strategic Management
Strategic planning takes a wider view of the business. For businesses that want to find new ways to grow, this type of scenario planning helps explore new paths by identifying the risks, costs, and returns.
Use case: If a business wants to expand into a new market, what impact will this have?
Event-driven
This type of scenario planning is for one-off occurrences.
Use case: If there is a cyberattack on a business.
How to do Scenario Planning
To undertake scenario planning:
Benchmark and Define Goals
You need to understand where the business is to begin with. Once you have benchmarked the current position, you then need to create a goal. What do you want to achieve from scenario planning?
At M Squared Accountancy Ltd, we undertake scenario planning for our clients and take the time to understand their business, which means the results are more accurate.
ID Key Triggers
At this stage, key drivers should be identified that could impact the business.
Develop Scenarios
Pick the type of scenario planning and your approach to it. Compile information and create the different scenarios, creating a best-case scenario, a worst-case, and an in-between.
Explore the Impact of Each Scenario
With your scenario planning report, compare the impact each would have on the business.
Create a Strategy
With the information, create a strategy with the key drivers.
Monitor and Adapt
Regularly review the strategy to see if you’re on track and adjust where necessary.
How an Accountant can Help you With Scenario Planning
Scenario planning takes a lot of time and needs to be done accurately to get the best result (otherwise, it could be a waste of time and resources). And often, management is too busy to stop and look at the big picture.
A strategic accountant will help you with scenario planning to save you the time and stress of undertaking it.
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